2020 (8) TMI 356 - AT - Income Tax

Disallowance of deduction claimed under the head income from other sources - Whether the assessee is eligible to claim the expenditure incurred in earning of the interest income as per the provisions of Section 57? - Whether the assessee is eligible to claim deduction u/s 37 in case such interest income is to be treated under the head income from the profits and gains of business or profession ? - HELD THAT - For the amount received on interest, the assessee would not be in a position to lend the amount on interest to earn interest income. Hence, netting of the interest income on the interest expenditure is a prerequisite for correct determination of taxable income. Keeping in view, decision of the CIT (A) that there is no nexus between the interest earned and the interest paid cannot be upheld. As a result, the assessee is allowed to claim the interest expenses. Regarding the alternate decision of the ld. CIT (A) that the interest income constitutes the business income, even in those circumstances, the interest paid to earn such interest income is to be allowed as deduction u/s 37 of the Act. Since, we hold in principle that the expenditure is allowable either way u/s 57, if the income is treated under the head income from other sources as per the provisions of Section 56 or u/s 37, if the income is treated under the head profits and gains of business or profession as per the provisions of Section 28, at this juncture, we refrain from determining issue of the claim of preclusion or collateral estoppel under which head the income earned by the assessee is taxable. - Appeal of the assessee is allowed.

Issues Involved:

1. Eligibility of the assessee to claim the expenditure incurred in earning interest income under Section 57 of the Income Tax Act.
2. Eligibility of the assessee to claim deduction under Section 37 if the interest income is treated as business income.

Detailed Analysis:

Issue 1: Eligibility to Claim Expenditure under Section 57

The assessee filed a return of income declaring "Nil" income, which was selected for Limited Scrutiny to verify the correctness of deductions against income from other sources. The Assessing Officer (AO) disallowed the deduction of ?1,59,37,109 claimed by the assessee under Section 57 of the Income Tax Act, 1961, on the grounds that the assessee failed to establish a nexus between the interest expenditure and the interest income earned. The AO also noted that the assessee did not produce evidence regarding the identity, genuineness, and creditworthiness of the parties involved in the transactions.

The CIT(A) upheld the AO’s decision, stating that the assessee could not substantiate the claim of interest expenditure being laid out or expended wholly and exclusively for the purpose of earning interest income. The CIT(A) also observed discrepancies in the accounts and found that the assessee failed to establish that the interest paid was for earning the interest income.

Issue 2: Eligibility to Claim Deduction under Section 37

The AO treated the interest income as business income and concluded that the interest expenditure was not allowable under Section 40(a)(ia) due to non-deduction of TDS. The CIT(A) supported this view, stating that the assessee was engaged in the business of financing and thus, the interest income should be treated as business income. However, the CIT(A) also noted that the assessee failed to establish that the interest expenditure was incurred wholly and exclusively for business purposes, as required under Section 37.

Tribunal’s Findings:

The Tribunal examined the details of interest income and interest expenditure. The assessee earned interest from seven parties amounting to ?1,34,39,809 and paid interest to eleven parties totaling ?1,59,37,109. The Tribunal found that netting of the interest income against the interest expenditure is necessary for the correct determination of taxable income. Therefore, the decision of the CIT(A) that there was no nexus between the interest earned and the interest paid could not be upheld. The Tribunal allowed the assessee to claim the interest expenses under Section 57.

Regarding the alternate decision that the interest income constitutes business income, the Tribunal held that even in such circumstances, the interest paid to earn the interest income should be allowed as a deduction under Section 37. The Tribunal concluded that the expenditure is allowable either under Section 57, if the income is treated as "income from other sources," or under Section 37, if the income is treated as "profits and gains of business or profession."

Conclusion:

The appeal of the assessee was allowed, permitting the claim of interest expenses either under Section 57 or Section 37, depending on the classification of the income. The Tribunal refrained from determining the issue of the claim of preclusion or collateral estoppel regarding the head under which the income is taxable.

Order Pronounced:

The order was pronounced in the Open Court on 17/07/2020.

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